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Impact of Monetary Policy on Financial Markets Efficiency and Speculative Bubbles: A Non-linear Entropy-based Approach

Angélica Alonso-Rivera, Salvador Cruz-Ake () and Francisco Venegas-Martínez

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines, through the concept of mutual information based on entropy, the impact of monetary policy on the loss of efficiency in the financial markets and speculative bubbles. The proposed information measure is useful to quantify the efficiency with which financial markets respond to the implementation of monetary policy. The findings show that an increase in both money supply and credit growth, as well as a declining of interest rates, generate strong inefficiencies during the initial periods of formation of a bubble. Moreover, empirical evidence suggests that when a loose monetary policy generates inefficiencies, its instruments are not effective to realign the performance of financial markets.

Keywords: Monetary policy; speculative bubbles; market efficiency; non-linear models; entropy. (search for similar items in EconPapers)
JEL-codes: E58 (search for similar items in EconPapers)
Date: 2014-05-21
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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